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A company is expected to pay future dividend as follows
Y1 = $1
Y2 = $1.5
Y3 = $2
From Y4 the dividend will consistently grow by 4% each year. The Ke is 10%.
Required:
Estimate the market Price of each share.Solution
Market price of each share should be the present value of future dividends discounted at ke
Years dividends disc factor at Ke PV
1 1 0.909 0.91
2 1.5 0.826 1.24
3 2 0.751 1.50
4-? 2(1+4%) = 2.08 (1/(10%-4%)) X 0.751 26.0329.68
Sir in the above solution , I did not understand just 1 thing, that in yr 4 to perpetuity, calculating its discount factor should be 1/10%= 10 – 2.487= 7.513 na? Can you please explain me DF for year 4 to perpetuity .It should be 7.513 in my opinion after watching the OT lecture . And then 2.08 should be multiplied by 7.513 to get PV at year 4
From year 4 onwards it is an inflating perpetuity, and discounting at 10% would only be correct if there was no inflation.
When there is inflation we need to use the dividend growth formula, and I go through examples like this in the lectures on the valuation of securities.From year 4 onwards it is an inflating perpetuity, and discounting at 10% would only be correct if there was no inflation.
When there is inflation we need to use the dividend growth formula, and I go through examples like this in the lectures on the valuation of securities.
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